FDI vs FII: Key Difference Between FDI and FII

Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) are two different kinds of foreign investors who invest in India to capture the country’s economic growth. Both forms of investment bring in capital inflows from outside of India, but they have different significance in their investing style, nature, objectives, investing style, and impact on the economy.

What is FDI (Foreign Direct Investment)?

FDI stands for Foreign Direct Investments and refers to an investment made by a company or individual in one country in business interests or assets in another country. This investment involves a long-term interest in the business, and typically it means owning a significant stake of 10% or more in a company or establishing a subsidiary, joint venture, or acquiring assets in India.

Features of Foreign Direct Investment

1. Long-term Investment: FDI is generally looking for long-term investment aimed at establishing a lasting presence in the foreign market, to capture the consistent growth in the markets over the period.
2. Control: Investors often have significant control over the foreign business by owning a stake of more than 10% to utilize their voting rights of the company in the FDI category.
3. Transfer of Technology and Expertise: FDI helps in the transfer of technology, skills, and managerial expertise to the country. Helping to improve the country’s development toward economic growth and improving the efficiency of allocation of the resources 
4. Infrastructure Development: FDI often leads to the development of infrastructure in the host country which leads to an increase in the employment count by creating jobs via the expansion of multinational companies.
5. Job Creation: It can lead to the creation of jobs and boost economic activity. Also helps while giving employment to the local people in their expansion of new businesses which increases the per-capita income of the country.
6. Risk: Due to long-term commitment, FDI typically faces more risk in terms of fluctuations of currency, changes in tax rates, government policies, political changes, and changes in FEMA policies.

What is FII (Foreign Institutional Investment)?

Foreign institutional investments refer to investments made by foreign institutions, in Indian financial products such as Stocks, mutual funds, pension funds, and hedge funds, debentures in the primary and secondary markets. FIIs usually invest in stocks, bonds, and all other financial instruments, typically with a short-term or medium-term horizon to capture the trend changes in the country.

Features of Foreign Institutional Investment

1. Short-Term Investment: FII is generally looking for a long-term investment horizon aimed to capture the changes in trends in the markets in a shorter period. They make short-term or medium-term investments and usually change their investments along the market trends.
2. No Control: FIIs don’t usually don’t have any kind of significant control over the stocks win which they invest.
3. Market-Driven: Investments are primarily based on the performance of the market and financial instruments. The markets they invest in are highly liquidated assets to ensure liquidity issues over the market trends.
4. Liquidity: FII investments are more liquid and can be easily bought and sold in the markets without facing any kind of issues to ensure smoother and safer transactions.
5. Volatility: The investments made by the FII are more susceptible to market volatility and changes in economic conditions while ensuring safer exit on reversal of trends.
6. Lower Risk: Compared to FDI, FII is generally considered to carry lower risk due to its short-term nature. They prefer eto it in a short time when they capture their targeted returns

Difference Between FDI and FII

Advantages of Foreign Direct investments

1. Economic Growth: FDI contributes their funds for the economic development of the host country.
2. Technology Transfer: FDI ensures to Facilitates the transfer of advanced technology and managerial expertise to the host country
3. Employment Creation: Generates employment opportunities while expanding their business in various sectors.
4. Improvement in Infrastructure: Often leads to the development of essential infrastructure.
5. Increased Competition: Encourages healthy competition in the domestic market.

Disadvantages of Foreign Direct investments

1. Loss of Control: Foreign investors may exert considerable influence or control over the business.
2. Profit Repatriation: A significant portion of the profits may be sent back to the home country of the investor.
3. Cultural Erosion: This can lead to the erosion of local culture and values due to foreign influence.
4. Dependency: The host country may become overly dependent on foreign investments.

Advantages of Foreign Institutional Investors

1. Increased Liquidity: Provides increased liquidity to financial markets.
2. Boost to Stock Market: Helps in increasing market capitalization and stability.
3. Capital Inflow: This brings in capital that can be used for growth and development.
4. Efficient Resource Allocation: FIIs tend to direct investments to more efficient and profitable sectors.

Disadvantages of Foreign Institutional Investors

1. Market Volatility: FIIs may cause market instability due to short-term investment behavior.
2. Foreign Influence: Foreign investors may have a disproportionate impact on the domestic financial market.
3. Exit Risk: FIIs may exit the market quickly, causing volatility and depreciation in asset values.
4. Dependency on Global Factors: FIIs are often affected by global economic conditions, which can affect the host economy.

Key Takeaways:

• FDI focuses on establishing a long-term business presence, while FII involves short-term financial market investments.
• FDI usually provides more control over businesses, whereas FII provides no such control.
• FDI contributes to infrastructure, technology, and job creation, while FII boosts market liquidity and capital flows.
• FDI is riskier and subject to more regulations, while FII is more liquid and less regulated.
• Both FDI and FII play crucial roles in the economic development of a country, with their advantages and disadvantages.

Conclusion

FDI and FII both play crucial but distinct roles in the economic development of a country. FDI contributes to the growth of industries, infrastructure, and employment, often leading to long-term benefits for the economy. However, it carries a higher risk due to its long-term nature and dependency on the stability of the host country. FII, on the other hand, provides a source of liquidity and capital for financial markets, helping to stabilize and grow stock markets and bond markets in the short run. However, the volatility of these markets can make FII riskier in times of economic uncertainty.

We can consider that FDI and FII serve different objectives where FDI focuses on sustainable, long-term growth through business investment, and FII focuses on quick capital returns through financial markets both are essential for a country’s economic prosperity. Understanding how to attract and manage both types of investments is vital for policymakers seeking to ensure a balanced and robust economic growth strategy.